The Swiss Ramble

Tuesday, January 31, 2017

This season has seen a return to form for Chelsea following
the appointment of Antonio Conte. The former manager of Italy is famed for his
passion, but also possesses much tactical astuteness, as evidenced by
previously leading Juventus to three consecutive Serie A titles. Under his guidance, Chelsea are currently setting
the pace and look a very good bet for the league title.

This demonstrates just how quickly things can change in
football, as the 2015/16 season was Chelsea’s worst in the Roman Abramovich era
with the club slumping to a disappointing tenth place in the Premier League,
thus failing to qualify for Europe for the first time in 20 years. This
inevitably resulted in the departure of José Mourinho, the self-proclaimed
“special one”, with the reins handed to Guus Hiddink until Conte’s arrival.

This dismal performance was matched off the pitch with the
2015/16 accounts revealing a £70 million pre-tax loss, around £49 million worse
than the previous season’s £21 million deficit.

In fairness, this was predominately due to £75 million of
exceptional expenses, largely £67 million to terminate the Adidas kit supplier
contract in favour of a significantly more lucrative deal with Nike, plus £8
million compensation to Mourinho and his team. Without these exceptionals,
Chelsea would have reported a profit before tax of £5 million.

Revenue rose £15 million (5%) to a record level of £329
million, as commercial income increased by £9 million (8%) to £117 million
following the new shirt sponsorship with Yokohama Tyres.

Broadcasting income was also up £7 million (5%) at £143
million with the higher UEFA deal increasing Champions League distribution by
around £20 million, though this was partly offset by the £12 million reduction
in Premier League TV money due to the lower league finish. Gate receipts fell
slightly by £1 million to £70 million.

"U Got The Look"

In addition, profits on player sales increased by £8 million
to an impressive £49 million, principally due to the sales of Ramires to
Jiangsu Suring, Petr Cech to Arsenal, Mo Salah to Roma, Oriol Romeu to
Southampton and Stipe Perica to Udinese.

In contrast, the wage bill rose by £7 million (3%) to £222
million, while player amortisation also increased £2 million (2%) to £71
million, though other expenses were £11 million lower at £71 million.

It is also worth noting the enormous £29 million loss that
Chelsea made on cash flow hedges, as FX movements dramatically reduced the
value of their forward currency contracts, presumably due to Brexit. This took
their comprehensive loss to £99 million.

For comparison, Manchester United reported a similar £38
million loss on cash flow hedges, while this was not yet an issue for Arsenal
or Manchester City, whose accounts closed on 31 May (i.e. pre-Brexit).

Chelsea’s £70 million loss is likely to be the worst
financial performances in England’s top flight in 2015/16. The only other club
to have announced a loss so far is Everton with £24 million.

In contrast, six of the eight Premier League clubs that have
published their accounts to date for last season have reported profits, the
largest being Manchester United £49 million, Manchester City £20 million and Norwich
City £13 million, followed by Arsenal £3 million, Stoke City £2 million and
West Bromwich Albion £1 million.

Although football clubs have traditionally lost money, the
increasing TV deals allied with Financial Fair Play (FFP) mean that the Premier
League these days is a largely profitable environment with only six clubs
losing money in 2014/15. This group largely comprised clubs that have been
badly run (Aston Villa, Sunderland and QPR), but also included Manchester
United, Everton and, yes, Chelsea.

Chelsea’s loss would have been even higher without the
benefit of £49 million profit on player sales, which will certainly be one of
the highest in the Premier League in 2015/16, if not the highest.

Of course, Chelsea are no strangers to making losses in the
Abramovich era, as they have invested substantially to first build a squad
capable of winning trophies and then to keep them at the top of the pile.

Since the Russian acquired the club in June 2003, it has
reported aggregate losses of £753 million, averaging £58 million a season,
though there has been some improvement since the spectacular £140 million loss
in 2005 with Chelsea posting profits in two of the last five years.

The first profit made under the Abramovich ownership was a
small £1 million surplus in 2012, though this did owe a lot to £18 million
profit arising from the cancellation of preference shares previously owned by
BSkyB, while they were also profitable in 2014.

Chairman Bruce Buck has consistently maintained that the
club’s objective is sustainability: “It has long been our aim for the business
to be stable independent of the team’s results and we continue to reinforce
that.”

Chelsea’s figures have consistently suffered from so-called
exceptional items, which have increased costs by an amazing £202 million since
2005.

Leading the way are two early terminations of shirt
sponsorship agreements £93 million and money paid as compensation paid to
dismissed managers £69 million, though the list also includes impairment of
player registrations £28 million, tax on image rights £6 million, impairment of
other fixed assets £5 million and loss on disposal of investments £1 million.

On the bright side, Chelsea appear to be learning from their
mistakes, as the recent pay-off to Mourinho and his coaching team of £8 million
was around a third of the £23 million it cost in 2008.

It is not clear whether the £5 million reportedly paid to
former club doctor Eva Carneiro following an employment tribunal was included
in this year’s accounts or will only be booked next year.

However, it is profit from player sales that is having an
increasing influence on Chelsea’s figures. In the nine years between 2005 and
2013, Chelsea averaged £13 million profit from selling players, but this has
shot up to an average of £52 million in the three years since then.

Last year included the eye-catching £25 million sale of
Ramires to China, while previous seasons featured some other big money moves:
David Luiz (PSG) £40 million, Juan Mata (Manchester United) £32 million, Romelu
Lukaku (Everton) £28 million, André Schürrle (Wolfsburg) £22 million and Kevin
De Bruyne (Wolfsburg) £17 million.

It is notable how much more money Chelsea make from player
sales than their direct rivals, e.g. over the last three seasons Chelsea earned
£155 million, compared to just £38 million at Arsenal, £35 million at
Manchester City and £21 million at Manchester United. Although Tottenham,
Liverpool and Southampton also generate substantial sums from transfers, this
is more understandable, given their revenue shortfalls.

"Put on your dancing shoes"

Next year’s accounts will be more of the same following the £60
million sale of Oscar to Shanghai SIPG. This trend of players making lucrative
moves to China has clearly benefited the club financially, but it has not met
with Conte’s full approval, “We are talking about an amount of money which is
not right”, though fans of other clubs could be forgiven for thinking that this
is a bit rich, coming from a Chelsea manager.

Indeed, led by Marina Granovskaia, one of Abramovich’s
closest associates, Chelsea have perfected a model whereby they consistently
make money from player sales. As well as the big ticket deals already
mentioned, Chelsea have also made extensive use of the loan system with an
incredible 35 players currently listed as being out on loan (though I may well have lost count).

Although the club argues that this strategy is simply aimed
at giving players experience, it is difficult not to believe that this is
primarily a money making exercise. Given that very few of these players have
succeeded in establishing themselves in Chelsea’s first team, it would appear
that the objective is to develop players for future (profitable) sales, while
effectively placing them in the shop window.

"Oh, sit down, sit down next to me"

The most recent example is Patrick Bamford, signed for £1.5
million in 2012, and sold to Middlesbrough this month for a fee of £6 million,
potentially rising to £10 million with add-ons, even though he never appeared
for Chelsea’s first team. During the last five years the England U21
international has been loaned out no fewer than six times.

From a financial perspective, this is a smart move that has
helped Chelsea meet the Financial Fair Play (FFP) regulations, though the moral
counterpoint was delivered by FIFA President Gianni Infantino, “It doesn’t feel
right for a club to just hoard the best young players and then to park them
left and right. It’s not good for the development of the player.”

However, even though some might complain that this policy smacks
of treating players like commodities (“buy low, sell high”), not to mention
ensuring that rival clubs cannot access promising talent, there are (currently)
no rules against it and other clubs, such as Udinese, have operated in a
similar way for many years without sanctions.

To get an idea of underlying profitability and how much cash
is generated, football clubs often look at EBITDA (Earnings Before Interest,
Depreciation and Amortisation), as this metric strips out player trading and
non-cash items.

In Chelsea’s case this highlights their recent improvement,
as it is has been positive for the last four years, rising from £16 million in
2015 to £35 million in 2016, though still lower than the £51 million peak in
2014.

However, to place that into context, this is way behind
Manchester United £192 million, Manchester City £109 million and Arsenal £82
million. United’s amazing ability to generate cash means that their EBITDA (“cash
profit”) is more than five times as much as Chelsea and helps explain the
Blues’ focus on player sales.

Chelsea have increased their revenue by 29% (£73 million) in
the last three years from £256 million to £329 million. The growth is split
pretty evenly between broadcasting income, which has increased 36% (£38
million) from £105 million to £143 million, thanks to new TV deals in both the
Premier League and the Champions League; and commercial income, which has
nearly gone up by nearly 50% from £80 million to £117 million.

Match day receipts have actually fallen slightly from £71
million to £70 million, which underlines why Chelsea are planning to expand
their stadium.

Although Chelsea’s £15 million (5%) revenue growth in
2015/16 took their revenue to a record level, it was not that good compared to
their major rivals. Admittedly, Manchester United’s £120 million (30%) growth
was influenced by their return to the Champions League, but the growth at
Manchester City £40 million (11%) and Arsenal £21 million (6%) was also higher
than Chelsea.

That said, Chelsea’s revenue should grow in 2016/17, despite
a £60 million reduction from the lack of European competition, as they will
benefit from the new Premier League TV deal including a higher league position
(+£70 million) plus a new commercial deal with Carabao (+£10 million). That
should mean a net £20 million increase to around £350 million.

Furthermore, 2017/18 will be boosted by the £30 million
increment from the Nike kit deal. On the relatively safe assumption that Chelsea
qualify for the Champions League, the 2017/18 figures should be close to £450
million.

As it stands, Chelsea’s revenue of £329 million was the
fourth highest in England in 2015/16, though nearly £200 million lower than United’s
£515 million. They were also a fair way behind Manchester City £392 million,
but quite close to Arsenal £351 million.

Liverpool were within striking distance at £302 million, but
there was a significant gap to the remaining Premier League clubs: Tottenham
Hotspur £209 million, West Ham £144 million and Leicester City £129 million.

Chelsea remained in eighth place in the Deloitte 2016 Money
League, only behind Manchester United, Real Madrid, Barcelona, Bayern Munich,
Manchester City, Paris Saint-Germain and Arsenal. This is obviously excellent,
but they face three major challenges here (in common with other English clubs):

The leading clubs continue to grow their revenue apace,
e.g. Real Madrid and Barcelona have reportedly agreed massive new kit supplier
deals worth north of £100 million a season.

The weakening of the Pound since the Brexit vote means
that continental clubs will earn much more in Sterling terms, e.g. the latest
Money League was converted at €1.3371, while the current rate has slumped to
around €1.17. At that rate, the €620 million earned by Real Madrid and
Barcelona would be equivalent to £530 million, taking them above Manchester
United.

The Money League highlights the increasingly competitive
nature of England’s top flight with no fewer than 12 Premier League clubs in
the top 30 – even before the lucrative new TV deal.

Eagle-eyed observers will have noticed that the Money League
figure for Chelsea’s revenue of £335 million is £6 million higher than the £329
million reported by the football club. This is because they have used the
figure from the holding company, Fordstam Limited.

Although this company has not yet published its 2016
accounts, the £319.5 million reported in 2015 is exactly the same as the figure
in last year’s Money League. The difference is entirely in commercial income.

If we compare Chelsea’s revenue to that of the other nine
clubs in the Money League top ten, we can immediately see where their largest
problem lies, namely commercial income, where Chelsea are substantially lower
than their rivals that have traditionally been more successful in monetising
their brand: Manchester United £150 million, Bayern Munich £134 million (£244
million minus £113 million), Real Madrid £80 million and Barcelona £99 million.
The £106 million shortfall against PSG is largely due to the French club’s
“innovative” agreement with the Qatar Tourist Authority.

On the plus side, Chelsea look to be fine on broadcasting
and not too bad on match day income, though there is room for improvement in
the latter category.

The growth in broadcasting income in 2015/16 means that this
now accounts for 43% of Chelsea’s total revenue, ahead of commercial income
35%, which has risen from 26% in 2009. As a consequence, the importance of match
day income has diminished from 36% to only 21% in the same period, once again
reiterating the rationale for the planned stadium expansion.

Chelsea’s share of the Premier League television money
dropped £12 million from £99 million to £87 million in 2015/16, largely due to
finishing tenth compared to winning the title the previous season.
Nevertheless, they earned more three clubs finishing above them (Southampton,
West Ham and Stoke City), as the smaller merit payment was more than offset by
higher facility fees for having more games broadcast live.

The mega Premier League TV deal in 2016/17 will deliver even
more money. Based on the contracted 70% increase in the domestic deal and an
estimated 40% increase in the overseas deals, the top four clubs will receive
£150-160 million, while even the bottom club will trouser around £100 million.

Although this is clearly great news for Premier League
clubs, it is somewhat of a double-edged sword for the elite, as it makes it
more difficult (or at the very least more expensive) to persuade the mid-tier
clubs to sell their talent, thus increasing competition

The other main element of broadcasting revenue is European
competition with Chelsea receiving €69 million for reaching the last 16 in the
Champions League, which was €30 million more than reaching the same stage the
previous season, partly influenced by the increase in the 2016 to 2018 cycle,
namely higher prize money plus significant growth in the TV (market) pool,
thanks to BT Sports paying more than Sky/ITV for live games.

In fact, Chelsea actually earned the sixth highest in the
Champions League, more than semi-finalists Bayern Munich, because of how the TV
(market) pool works. Each country’s share of the market pool is based on the
value of the national TV deal, which means that English clubs have prospered
from the huge BT Sports deal, though it should be noted that around half of
this goes into the central pot, so they do not receive the full benefit.

Half of the TV pool then depends on the position that a club
finished in the previous season’s domestic league: the team finishing first
receives 40%, the team finishing second 30%, third 20% and fourth 10%. As
Chelsea won the title in 2014/15, compared to finishing third the year before,
they received a higher percentage in 2015/16 for this element.

The other half of the TV pool depends on a club’s progress
in the current season’s Champions League, which is calculated based on the
number of games played (starting from the group stages). In this way, Manchester
City reaching the semi-final last season adversely impacted Chelsea’s share.

Although some have played down the value of Champions League
qualification in light of the massive new Premier League TV deal, it is evident
that it is still financially beneficial.

It has clearly helped Chelsea, who have earned €253 million
from Europe in the last five seasons, more than any other English club. It has
thus become a major revenue differentiator against their domestic rivals with
Chelsea earning substantially more than them in this period: City €32 million,
Arsenal €77 million, United €95 million, Liverpool €176 million and Tottenham
€212 million.

Commercial revenue rose by 8% (£9 million) to £117 million
in 2015/16, which was a little disappointing, given that this year included the
first year of the five-year shirt sponsorship deal with Yokohama Tyres. The
implication is that some of the commercial deals include success clauses, so
the lower league place and failure to qualify for Europe bit hard.

In fact, since 2014 Chelsea’s commercial growth of £8
million (7%) has been smaller than all their rivals, notably Manchester United
£79 million (42%) and Arsenal £30 million (39%).

Currently, Chelsea’s £117 million is less than half of
United’s astonishing £268 million, £90 million below Manchester City’s £178
million and even behind Liverpool’s £120 million.

However, Chelsea’s commercial revenue will increase substantially
in the next couple of years. First, they agreed a three-year deal worth £10
million a year with Carabao, a Thai energy drink company, to sponsor training
wear from 2016/17.

They then signed “the largest commercial deal in the club’s
history” with Nike, which is worth £60 million a year (15-year deal for £900
million), i.e. twice as much as the current Adidas £30 million contract, from
2017/18.

"Boy from Brazil"

The Adidas deal was due to run to 2023, so the six years
from 2017 would have brought in £180 million, compared to £360 million from
Nike over the same period, meaning a £180 million increase. Although this is
reduced to £113 million after considering the £67 million termination fee, it still
represents a tidy improvement.

In addition, the Yokohama Tyres shirt sponsorship of £40
million a year is worth more than double the £18 million previously paid by
Samsung. All in all, these three kit deals will be worth £110 million per
annum, which is £62 million more than the previous £48 million.

These deals will leave Chelsea only behind Manchester United
for the main shirt sponsorship and kit supplier deals – and it’s difficult to
compete with their massive agreements with Chevrolet £56 million (at the June
2016 USD exchange rate) and Adidas £75 million.

Similarly, the £60 million Nike kit supplier deal will be
much better than those signed by Arsenal and Liverpool, respectively £30
million (PUMA) and £28 million (Warrior), though these will be up for
renegotiation before Chelsea.

Looking further afield new kit agreements reportedly signed
by Barcelona (Nike) and Real Madrid (Adidas) are worth £125 million and £115
million respectively (at the current exchange rate), so the bar is continually
being raised.

Match day income was £1 million (2%) lower at £70 million,
partly due to only staging two domestic cup games, compared to three the
previous season. This revenue stream peaked at £78 million in 2011/12, thanks
to the victories in the Champions League and the FA Cup.

Chelsea’s match day revenue is at least £30 million lower
than Manchester United and Arsenal, though is still pretty good, considering
that their grounds are much larger.

This is reflected in the average attendances with Chelsea’s
41,500 miles behind United (75,000) and Arsenal (60,000). It is also lower than
Manchester City, Newcastle United, Liverpool and Sunderland.

The reason that Chelsea’s revenue is higher than clubs with
higher attendances is that they earn a healthy £2.8 million a game, compared
to, say, £2.0 million at Liverpool and £1.8 million at Manchester City. This is
partly due to their ticket prices, which, according to the BBC Price of
Football survey, are the third highest in England, only surpassed by Arsenal
and Tottenham.

That said, Chelsea have again held ticket prices at 2011/12 levels, which means that general admission prices have remained unchanged in nine of the past 11 years. In addition, supporters attending away games in the Premier League over the next three seasons will pay no more than £30 a ticket.

Nevertheless, Chelsea’s revenue shortfall compared to
United, Arsenal, Real Madrid and Barcelona helps explain why the club has spent
so much time searching nearby locations for a new stadium.

After a couple of false starts, including possible moves to
Battersea Power Station, Earls Court and White City, the good news is that
planning permission has recently been granted by Hammersmith and Fulham borough
council to build a new 60,000 capacity on the Stamford Bridge site.

This will be a complex build with the plan being to dig down
to lower the arena into the excavated ground, while the club will also need to
demolish Chelsea Village buildings that surround the ground and build walkways over
the two rail lines that flank the stadium.

The assumption is that Abramovich will cover the costs,
which have been estimated at £500 million, though it could be much higher, e.g.
Tottenham’s new stadium will reportedly cost £750 million.

"Hair, he goes, there he goes again"

Chelsea Pitch Owners (CPO) still have to vote on whether to
grant Chelsea a longer lease on Stamford Bridge and to give them permission to
move away temporarily while the new stadium is constructed, but it would be
surprising if they did not give the green light.

The aim is to have the new stadium ready for the 2021/22
season, which would mean Chelsea having to find a temporary home for three
years. The club is in discussions with the Football Association to play at
Wembley (as are Tottenham), but nothing has been decided. This would cost up to
£15 million rent a year, though income might be higher if the crowds increased.

Chelsea have previously highlighted “the need to increase
stadium revenue to remain competitive with our major rivals, this revenue being
especially important under FFP rules.” In particular, the doubling of corporate
seating to 9,000 seats could deliver significant additional revenue with more potentially
coming from naming rights or other sponsorship opportunities.

Wages rose by £7 million (3%) to £222 million, driven by a
massive increase in headcount, up 104 from 681 to 785. Playing staff, managers
and coaches increased by 45 to 137, while administration and commercial staff
were 59 higher at 648. The increase would have been even higher if bonuses had
been paid at the same level as the league-winning season in 2014/15.

As a technical aside, note that these wage figures have been
corrected when they have included exceptional items, e.g. in 2013/14 the
reported staff costs of £190.6 million included a £2.1 million credit for the
release of a provision for compensation for first team management changes, so
the “clean” wage bill was £192.7 million.

Following the revenue growth, the wages to turnover ratio
dropped from 69% to 68%, significantly better than the recent 82% peak in 2010.
Interestingly, since the start of the new Premier League TV deal in 2013/14,
revenue and wages growth is identical at 29%, implying a degree of control.

Nevertheless, Chelsea’s wages to turnover ratio is still the
highest of the elite clubs, with the other members of the “Sky Six” much lower:
Manchester United 45%, Manchester City 50%, Tottenham 51%, Arsenal 56% and
Liverpool 56%.

That said, Chelsea have been overtaken by Manchester United,
whose £232 million wage bill is once again the largest in the top flight.
However Chelsea remain a fair bit higher than Manchester City £198 million and
Arsenal £195 million.

There is then a big gap to the other Premier League clubs
with the nearest challengers being Liverpool £166 million, Tottenham £101
million (both 2014/15 figures) and Everton £84 million.

This reflects Chelsea’s stated strategy: “In order to
attract the talent which will continue to win domestic and European trophies
and therefore drive increases in our revenue streams, the football club
continually invests in the playing staff by way of both transfers and wages.”

In the last three seasons, Chelsea’s wages have increased by
£50 million, which is in line with Manchester United £52 million and Arsenal
£41 million. The anomaly is Manchester City, whose wage bill declined by £39
million in this period, partly due to a group restructure, whereby some staff
are now paid by group companies, which then charge the club for services
provided.

Although there is a natural focus on wages, other expenses
also account for a considerable part of the budget at leading clubs, though
there was an unexplained £11 million reduction at Chelsea in 2015/16 to £71
million.

This means that Chelsea were also knocked off the top of this
particular league table, with both Manchester clubs now ahead: United £91
million, City £86 million.

Another cost that has had a major impact on Chelsea’s profit
and loss account is player amortisation, reflecting the significant investment
in players. Chelsea’s initial wave of purchases under Abramovich saw player
amortisation shoot up to £83 million in 2005, before falling away to £38
million in 2010 in line with less frenetic transfer activity. As spending
kicked in again, player amortisation has steadily risen back to £71 million in 2016.

The accounting for player trading is horribly technical, but
it is important to grasp how it works to really understand a football club’s
accounts. The fundamental point is that when a club purchases a player the transfer
fee is not fully expensed in the year of purchase, but the cost is written-off
evenly over the length of the player’s contract, e.g. midfield dynamo N’Golo
Kanté was reportedly bought from Leicester City for £32 million on a five-year
deal, so the annual amortisation in the accounts for him is £6.4 million.

This helps explain why clubs like Chelsea can spend so much
and still meet UEFA’s Financial Fair Play targets.

Unsurprisingly, this is one of the highest player
amortisation charges in the Premier League, only surpassed by big spending
Manchester City £94 million and Manchester United £88 million.

The value of Chelsea’s squad on the balance sheet increased
to £241 million in 2016, though this understates how much they would fetch in
the transfer market, not least because homegrown players are ascribed no value
in the books. Chelsea are one of the few clubs to formally acknowledge this
factor in the accounts, as they have valued the playing staff at a cool £399
million.

Chelsea’s activity in the transfer market is interesting.
For the four years up to 2010 Chelsea’s average annual net spend was just £2
million, before rising to £67 million in the four years up to 2014, then
apparently dropping back to £41 million in the last three seasons (excluding
this January transfer window).

However, this is a little misleading, as it is partly a
result of the increased player sales. If we look at gross spend, it tells a
different story with Chelsea averaging around £100 million a season over the
last seven years. Last summer alone they splashed £119 million on recruiting
David Luiz, Michy Batshuayi, N’Golo Kanté and Marco Alonso.

Even so, their total net spend of £123 million in the last
three seasons was comfortably beaten by Manchester City £299 million,
Manchester United £275 million and (less predictably) Arsenal £165 million,
though it was still a fair way above champions Leicester City £84 million.

Chelsea have no financial debt in the football club, as this has all been converted into equity by issuing new shares. That said, the club’s holding company, Fordstam Limited, does have well over £1 billion of debt (£1,097 million as of June 2015) in the form of an interest-free loan from the owner, theoretically repayable on 18 months notice.

There were some minimal contingent liabilities of £2.4
million, reflecting the fact that Chelsea, unlike most football clubs, pay all
their transfer fees upfront, which must be an advantage in negotiations
compared to other clubs that have to pay in stages.

Other clubs have to carry the burden of sizeable debt,
notably Manchester United who still have £490 million of borrowings even after
all the Glazers’ various re-financings and Arsenal, whose £233 million debt
effectively comprises the “mortgage” on the Emirates stadium.

The advantage of having a benefactor like Abramovich is
demonstrated by the annual interest payments at those clubs: £20 million for
United, £13 million for Arsenal. Since 2010 United have paid out more than £400
million in financing costs, while Arsenal have paid £275 million in interest
and loan repayments in that period. That is money that could have been spent on
transfers or player wages – if their owner had acted like Chelsea’s favourite
Russian.

Although Chelsea’s cash flow from operating activities has
turned positive in the last four seasons (after adjusting for non-cash flow
items, such as player amortisation and depreciation, plus working capital
movements), they still require funding from the owner to cover player purchases
and investment in improving facilities at Stamford Bridge and the training
ground at Cobham.

That amounted to £90 million in the last two years: £43
million in 2016 and £47 million in 2015. In fact, since Abramovich acquired the
club, he has put around £1 billion into the club, split between £620 million of
new loans and £350 million of share capital. In that period £685 million of
loans have been converted into share capital, including £12.5 million last
season.

Most of this funding has been seen on the pitch with £753
million (77%) spent on net player recruitment, while another £140 million went
on infrastructure investment. A further £46 million was required to cover
operating losses with £12 million on interest payments, while the cash balance
has increased by £23 million.

Indeed, Chelsea now have healthy cash at bank of £27
million, though this is still a lot lower than United £229 million and Arsenal
£226 million. It’s a different approach: Abramovich puts his money into the
club, especially the team, while United and Arsenal have to rely on cash
generated from their own operating activities – though they do leave an awful
lot of it in their bank account.

Given Chelsea’s several years of heavy financial losses,
many observers had believed that they would fall foul of FFP, but that has not
been the case with the accounts confirming that the club was compliant with
both UEFA FFP and Premier League financial regulations.

The club has taken advantage of some of the allowable
exclusions for UEFA’s break-even analysis, namely youth development,
infrastructure and (for the initial monitoring periods) the wages for players
signed before June 2010.

Even though Chelsea are compliant, it is clear that this
legislation has been at the forefront of the club’s thinking. The accounts
state: “FFP provides a significant challenge. The football club needs to
balance success on the field together with the financial imperatives of this
new regime.”

"Points of Authority"

Specifically, Chelsea will need to consider the Premier
League’s Short Term Cost controls, which restrict the annual player wage cost
increases to £7 million a year for the three years up to 2018/19 – except if
funded by increases in revenue from sources other than Premier League
broadcasting contracts, e.g. gate receipts, commercial income and profits on
player sales.

Sound familiar? That’s pretty much been Chelsea’s strategy
over the last few years.

It obviously helps if you have an owner with pockets as deep
as Abramovich, but that is no longer enough in a football world full of
financial regulations, so Chelsea have had to follow a different path.

It might sound a little strange to say this after Chelsea just announced a
£70 million loss, but there’s no doubt that there are some clever people at
Stamford Bridge, who have found several ways to grow income and thus meet the
demands of FFP. At the same time, they have managed to put together a squad that is not
only challenging for major honours, but is a good bet to win the Premier League for
the second time in three seasons.

Tuesday, January 24, 2017

This has been a challenging season for Ipswich Town, as they
have been poor in the league and recently suffered a humiliating, televised
defeat in the FA Cup against non-league Lincoln City. Manager Mick McCarthy
appears to retain the support of the board for the time being, but he has clearly
lost many of the fans.

This feels a little harsh on the experienced Yorkshire man,
who has arguably enabled Ipswich to punch above their weight during his tenure.
When he replaced Paul Jewell in November 2012, Ipswich were bottom of the
Championship, but McCarthy successfully guided the club out of the relegation
zone to finish in a comfortable 14th place.

Since then he has registered three successive top ten
finishes. His first full season in 2013/14 ended in a respectable ninth place,
before he led them to the play-offs in 2014/15. Last season Ipswich came a
somewhat disappointing seventh, but this was still ahead of many wealthier
clubs.

As McCarthy pointed out, “This is the first year that it’s
been a struggle.” To an extent, he has been a victim of his own success, as he
reached the play-offs on a shoestring budget, getting the most out of a fairly
average squad.

"Merry Christmas, Mr. Lawrence"

This reinforced the cautious approach of Marcus Evans, who
has frequently spoken of his determination to take Ipswich to the Premier
League since he bought 87.5% of the club in December 2007, but has equally
often been accused of lacking the ambition to do so.

Evans summarised his philosophy last month: “My view, based on
the finances available to us compared to those with parachute budgets and the
small group with, often short term, huge owner investment, is for the club to
maintain a sustainable and consistent strategy, which I firmly believe provides
a foundation each season for a promotion challenge.”

He then outlined the key elements of his strategy, “In
summary, a focus on the Academy; a competitive wage structure; careful use of
our transfer budget on developing players and a stable management team are
factors which I believe provide us with the best chance of promotion out of the
Championship, which is one of the toughest - and getting even tougher - leagues
in the world.”

Managing director Ian Milne was singing from the same song
sheet: “Marcus has gone for sustainability and Mick understands that. You can
achieve good things through getting the right people in your club and working
as a team from top to bottom.”

"A Grant don't come for free"

While all this is undoubtedly true, the concern is that this
conservative stance will mean a continuation of the 15-year groundhog day
existence that Ipswich have held in the Championship (or equivalent) since
relegation from the top flight in 2002. To paraphrase U2, it feels like Ipswich
are “stuck in a moment – and they can’t get out of it.”

Initially, Evans provided his managers with enough funding
to be competitive in the transfer market, but this did not achieve the desired
objective, as first Roy Keane, then Jewell essentially wasted the owners’ cash
with a series of poor choices. Not only did these expensive purchases not
deliver on the pitch, but they ended up being offloaded for peanuts, leading to
large financial losses arising from misplaced recruitment.

Having had his fingers burnt, Evans opted for a change in
strategy: “I wanted to work with a manager who was going to try to and coach
and make our players better, rather than give the manager the opportunity (to
simply buy players).”

"Don't Luke back in anger"

The owner explained: “You would have hoped that money had
resulted in better things, but look at Nottingham Forest – they lost £25
million last year and got nowhere. There are a lot of clubs out there that
spent a lot more than Ipswich did and who ended up in exactly the same
situation.”

The drive to more sensible cost management was also
influenced by the introduction of the Financial Fair Play rules, which
essentially aim to force clubs to live within their means.

As a result, in the past few years Ipswich have focused on
free transfers, loans and swap deals, while trying to bring through young
players from the Academy into the first team. As Milne explained, “We do have a
very good scouting network and that enables us to get players at the minimum
transfer fee.”

Consequently, Ipswich have averaged annual gross spend of
only £0.5 million in the last four seasons (though the January 2017 transfer
window has not yet closed), compared to £5.6 million a season in the first
three years of the Evans era. In the same periods, average net spend of £4
million has flipped to average net sales of £4 million, an £8 million reduction.

Last summer’s spending was a good example of Ipswich’s
policy: two promising young players were acquired in the shape of Grant Ward
from Tottenham Hotspur and Adam Webster from Portsmouth at a combined cost of
£1.4 million, while there were a couple of free transfers, including the
veteran journeyman Leon Best from Rotherham United.

Evans argued that there was also money splashed out on loan
fees and wages needed to tempt Premier League clubs to release players,
including Welsh internationals Tom Lawrence (from Leicester City) and Jonny
Williams (from Crystal Palace) and Conor Grant (from Everton), but Ipswich
supporters would justifiably point out that the club failed to replace forward
Daryl Murphy, who was sold to Newcastle United.

Ipswich’s parsimony can be seen by looking at the gross
spend of Championship clubs this season, when only six clubs spent less than
the Tractor Boys. These included two clubs with transfer embargoes (Blackburn
Rovers and Nottingham Forest) plus a few “minnows”, i.e. Preston North End,
Burton Albion, Rotherham United and Wigan Athletic.

The more meaningful comparison is with clubs seeking
promotion, as Evans himself noted, “Newcastle and Norwich spent more than £100
million between them on transfer fees in the August window as they chase an
immediate return to the Premier League.” Although this was actually factually
incorrect, his point was still valid as Newcastle and Aston Villa have spent
£55 million and £52 million respectively. Other big spenders include Fulham £22
million, Derby County £14 million, Wolverhampton Wanderers £11 million and
Bristol City £11 million.

Many managers would use this low spending as an excuse for
not meeting their objectives, but McCarthy is made of sterner stuff, saying
that he won’t “stamp his feet” over the restricted transfer budget given to him
by Evans. Instead, he sees it as his job to get more out of the players he’s
got.

That said, he would like his achievements to be recognised:
“I’ve done a bloody good job under the terms and conditions. I’ve sold Murphy,
I’ve sold Mings, and others, and we’ve stayed competitive.”

Despite this prudent policy, Ipswich reported a £6.6 million
loss in 2015/16, a £12.1 million deterioration from the previous year’s £5.5
million profit, though this was almost entirely due to a £11.5 million
reduction in profits on player sales. These dropped from £12.2 million in
2014/15, due to the sales of Tyrone Mings to Bournemouth and Aaron Creswell to
West Ham, to only £0.6 million.

The wage bill rose by £0.6 million (4%) from £16.0 million
to £16.6 million as “further funds were invested in the squad to challenge for
the play-off positions.” Other expenses also increased by £0.3 million (6%) to
£5.4 million, but player amortisation dropped by £0.5 million (74%) to just
£0.2 million.

Revenue slightly decreased by £0.1 million (1%), mainly due
to a £0.4 million (9%) reduction in commercial income to £4.4 million, offset
by broadcasting income rising by £0.3 million (6%) to £5.4 million. Gate
receipts were unchanged at £6.5 million, as the club’s share of receipts from
the League Cup tie against Manchester United at Old Trafford compensated for a
fall in attendances and the money from the previous season’s play-off
appearance.

Although a £7 million loss might not soundoverly impressive, it has to be assessed in
the context of England’s second tier, where the harsh reality is that most
clubs are loss-making, largely as a result of their natural desire to reach the
lucrative Premier League.

In this way, none of the Championship clubs that have so far
published their 2015/16 accounts has been profitable with some reporting hefty
losses: Brighton and Hove Albion £26 million, Hull City £21 million, Reading
£15 million and Bristol City £15 million. As Evans lamented, “Wouldn’t it be
nice… if you could turn a profit in the Championship, but I’m afraid that’s not
the case.”

One way a football club can compensate for operating losses
is via player sales, but Championship clubs have struggled to make big money
sales with the highest amount reported so far last season being Hull City’s £13
million – and they had Premier League players to offload following relegation
in 2015.

However, Ipswich’s profit on player sales of £0.6 million
was one of the lowest in the division – in contrast to 2014/15 when their £12.1
million profit was only surpassed by Norwich City’s £14 million. Of course, next
year’s accounts will be boosted by the £3 million sale of Daryl Murphy to
Newcastle.

Ipswich have only reported a profit once in the Evans era,
the £5 million in 2014/15, losing money in the other eight years. However, it
is noticeable that the losses have been reducing, effectively capped at £7
million in the past three seasons.

As Milne explained, “In 2012 the annual losses peaked at £16
million and we started to go down a slightly different route.” That was
actually the third worst loss in the Championship that year and served as a
major wake-up call.

The reason for this large deficit were given by finance
director Mark Andrews, “We brought in some experienced players in the 2011/12
season, Paul Jewell’s first season in charge, which kept the playing squad
costs high.”

However, Ipswich’s best results in recent times have been
boosted by large profits on player sales, as seen in 2014/15. Without the sales
of Mings and Cresswell, the reported profit of £5.5 million would have been a
loss of £6.7 million, i.e. in line with the £7 million losses in 2013/14 and
2015/16.

It was a similar story in 2011/12 when this activity contributed
£10.8 million, largely due to the transfers of Connor Wickham to Sunderland for
£8 million and Jon Walters to Stoke City for £2.75 million. Without these
sales, Ipswich would have registered another big loss of £14 million.

The owner has said that his funding “would eventually be
unsustainable without the benefits of transfer revenues from time to time to
offset the club’s running costs.” Interestingly, the club has made more money
from cheap, young players rather than experienced professionals. This was acknowledged
by Evans: “We lost some good players in the past who were out of contract”,
i.e. could leave for very little or even nothing.

To get an idea of underlying profitability and how much cash
is generated, football clubs often look at EBITDA (Earnings Before Interest,
Depreciation and Amortisation), as this metric strips out player trading and
non-cash items. In Ipswich’s case this highlights the changed strategy after
2012, as EBITDA has improved fromminus
£9 million in 2012 to minus £6 million in 2016 (though this was a million worse
than the previous year).

This might not sound overly impressive, as it is still
negative, but it has to be put into the context of the Championship, where very
few clubs manage to generate cash. Apart from Blackpool with their “unique”
approach to running a football club, no Championship has reported EBITDA higher
than £1.5 million in the last two seasons (in stark contrast to the Premier
League where in the same period every club enjoyed positive EBITDA, except the basket
case that is QPR).

Revenue has fallen by £1 million (6%) from the recent £17.2
million peak in 2011, which was boosted by reaching the Carling Cup the
semi-final and a profitable FA Cup match at Chelsea.

All revenue streams have fallen since then, especially
commercial income, which is 13% (£0.7 million) lower, though this is partly due
to a decision to outsource catering (and thus only including net royalty
payments in revenue). Gate receipts have rebounded, even though attendances
have fallen, partly due to ticket price increases.

Following the slight reduction in 2015/16, Ipswich’s revenue
of £16 million remains firmly in the bottom half of the Championship, a long
way behind the top three clubs, who all earned more than £40 million. Of
course, to a large extent, this only demonstrates the importance of parachute
payments for those clubs relegated from the Premier League.

This is clearly a sore point for Evans, “The average
parachute club starts with a £20 million per season head start over the rest of
us.” He added, “The lack of parity in the game certainly makes it harder to
compete. This season there were nine clubs benefiting from parachute payments
and there will be something similar next year. That gives them a massive
financial advantage.”

If these parachute payments were to be excluded, the gap
would obviously reduce, but Ipswich’s £16 million would still be a fair way
behind many other clubs, e.g. Brighton £25 million, Leeds United £24 million
and Derby County £21 million. Given these stats, Ipswich’s performance in the
last three seasons is worthy of some praise.

The mix of Ipswich’s revenue has changed over the years with
broadcasting rising from 13% in 2009 to 33% in 2016 and commercial falling from
41% to 27%. However, match day remains the most important revenue stream at
40%, even though it has declined from 46%.

Unsurprisingly, this means that Ipswich are one of the
Championship clubs most reliant on gate receipts. In percentage terms only four
clubs had a higher dependency in 2014/15: Nottingham Forest, Charlton Athletic,
Brighton and Millwall.

Gate receipts were flat at £6.5 million in 2015/16, even
though average attendance fell by 644 (3%), as this was offset by one
additional home cup game. Nevertheless, Ipswich’s match day revenue is the 9th
highest in the Championship, though still around £3 million lower than Brighton
£9.4 million and Leeds United £9.2 million.

Ipswich’s average attendance of 18,959 was actually the 8th
best in last season’s Championship, but a fair way behind clubs like Derby
County (29,663), Brighton (25,583) and Middlesbrough (24,627).

Ipswich’s attendances had been on a declining trend for a
number of years, but the charge to the play-offs resulted in an upswing in
2014/15. However, they have started to fall again since then with a further
slump this season to 16,789, which means that Ipswich have lost a third of
their crowd since the recent 25,651 peak in 2004/05.

Evans is acutely aware of the reduction in spectators: “We
can’t deny that attendances have been falling away somewhat this season – an
indication of the disappointing results we have had this year.”

He said that the club was “looking at creative ways of
getting supporters back to Portman Road.” These include low prices for
youngsters (e.g. the season ticket for under-11s has been held at just £10 for
nine successive years), interest-free direct debit monthly payment scheme and
discounts with local businesses. If Ipswich are promoted to the Premier League,
the season ticket will be upgraded at no extra price plus the holder will be
given a free season ticket.

However, fundamentally Ipswich’s ticket prices are among the
most expensive in the second tier. According to the BBC’s Price of Football
survey, no other fans in the Championship pay more for the most expensive
season ticket, while Town’s prices for the cheapest season ticket are only
surpassed by three clubs (Brighton, Newcastle and Norwich City).

From 2003 to 2013 season ticket prices had remained frozen
for seven out of the 11 years. However, prices have gone up every year since 2014/15,
including a 1.5% increase for the 2017/18 season (in line with the retail price
index).

Ipswich’s broadcasting revenue rose 6% (£0.3 million) to
£5.4 million in 2015/16, which was attributed to an increase in the Football
League basic distribution. In the Championship most clubs receive the same
annual sum for TV, regardless of where they finish in the league, amounting to
around £4 million of central distributions: £2.1 million from the Football League
pool and a £2.3 million solidarity payment from the Premier League. There are
also payments for each live TV game: £100,000 home; £10,000 away.

However, the clear importance of parachute payments is once
again highlighted in this revenue stream, greatly influencing the top nine
earners in 2014/15. Nevertheless, it should be noted that these payments are
not necessarily a panacea, e.g. Middlesbrough secured promotion last season,
even though their broadcasting income of £6 million was less than half the size
of those clubs boosted by parachutes.

Looking at the television distributions in the top flight,
the massive financial chasm between England’s top two leagues becomes evident
with Premier League clubs receiving between £67 million and £101 million in 2015/16,
compared to the £4 million in the Championship. In other words, it would take a
Championship club more than 15 years to earn the same amount as the bottom
placed club in the Premier League.

The size of the prize goes a long way towards explaining the
loss-making behaviour of many Championship clubs. This is even more the case
with the new TV deal that started in 2016/17, which will be worth an additional
£35-60 million a year to each club depending on where they finish in the table.

Even if a club were to finish last in their first season in
the top flight and go straight back down, their TV revenue would increase by an
amazing £95 million. They would also receive a further £71 million in parachute
payments, giving additional funds of around £166 million. If they survived
another season, you could throw in another £120 million.

Of course, if they did go up, Ipswich would also have to
spend more to strengthen their playing squad, but the net impact on the club’s
finances would undoubtedly be positive, as evidenced by the improvement in the
bottom line for those clubs promoted in the past few seasons.

As we have seen, parachute payments make a significant
difference to a club’s revenue and therefore its spending power in the
Championship. From this season, these will be even higher, though clubs will
only receive parachute payments for three seasons after relegation. My estimate
is £83 million, based on the percentages advised by the Premier League (year 1
– 55%, year 2 – 45% and year 3 – 20%), including around £40 million in the
first year. However, if a club is relegated after only one season in the
Premier League, it will only benefit from parachute payments for two years.

There are some arguments in favour of these payments, namely
that it encourages clubs promoted to the Premier League to invest to compete,
safe in the knowledge that if the worst happens and they do end up relegated at
the end of the season, then there is a safety net. However, they do undoubtedly
create a significant revenue disadvantage in the Championship for clubs like
Ipswich, as Evans has often stated.

It is worth noting that if Ipswich were to be promoted, then
they are contractually bound to make additional payments to players, coaches,
staff, players’ former clubs, season ticket holders and certain convertible
loan note holders. This is not quantified in the latest accounts, but was given
as £8.2 million in 2013.

Commercial income fell by 4% (£0.4 million) to £4.4 million
in 2015/16, though this is a little misleading, as the match day public
catering operation was outsourced whereby the club now receives a royalty based
on turnover.

Corporate sales and sponsorship were also slightly down on
last year, however merchandise sales exceeded 2014/15, further building on the
success of the change of kit supplier to Adidas in 2014 (a four-year deal).
This was the first time Ipswich had worked with the German supplier since the
glory days 35 years ago when they won the FA Cup and UEFA Cup under Bobby
Robson.

The shirt sponsorship is with the Marcus Evans Group, who
originally signed a five-year deal in 2008 worth a reported £4 million in total
and have subsequently extended this each season.

There is clearly room for improvement in the commercial area,
though to be fair only two Championship clubs (QPR and Leeds United) generate
more than £10 million a season. This is basically down to results, as Evans
admitted: “We work very hard maximising revenues for the club on a commercial
basis, but ultimately our product is about what the team delivers on the pitch.
And, like any business, if your product is of good quality, you’ll make more
money and sell more of your product.”

Ipswich’s wage bill increased by 4% (£0.6 million) to £16.6
million, as full-time headcount was up from 142 to 149, leading to the wages to
turnover ratio rising from 97% to 102%.

This was the second year in a row that wages have climbed, a
necessary evil for Town, as explained by Ian Milne when commenting on the
2014/15 figures: “The wage bill has gone up this season quite appreciably. People
say ‘where has the Tyrone Mings and Aaron Cresswell money gone?’ Well that’s
where it is being ploughed into.”

Nevertheless, wages are still 8% below the £18.0 million
peak in 2012, when the wages to turnover ratio was as high as 119%. Milne
again: “We’re not paying under the market value, but the important thing is
that we’re not paying over the market value either – which is something we have
done in the past. Back in 2012 (when the club made a loss of £16m) we were
paying some very high salaries.”

Clearly, the business model is still not ideal if revenue is
not sufficient to cover the wage bill, let alone any other expenses, but almost
every club in the Championship has a dreadful wages to turnover ratio with over
half of them being more than 100%. In fact, Ipswich’s 102% looks positively
reasonable compared to clubs like Brentford 178%, Nottingham Forest 170% and
Blackburn Rovers 134%.

The £17 million wage bill was also firmly in the bottom half
of the league, underlining the challenge in reaching the play-offs. In
particular, it was significantly lower than the likes of Cardiff City, Fulham, Reading,
Hull City, Blackburn Rovers and Nottingham Forest, whose wages were all above
£30 million. This season it will be even worse with the arrival of big spending
Newcastle United and Aston Villa in the Championship.

As Milne observed, “We certainly aren’t the highest spenders
in terms of wages. We are paying more than we were, but I suspect it is still
quite a bit less than some of the clubs that surround us.”

Of course, a high wage bill is no guarantee of success and
it is also true that clubs have been promoted with a low wage bill, e.g.
Burnley, but Ipswich’s relatively low wages certainly do not make it any
easier.

Other expenses rose by £0.3 million (6%) to £5.4 million in
2015/16, largely as a result of a restatement of the Football League pension
fund deficit (in accordance with Financial Reporting Standard FRS102) and
general cost increases, but this was still on the low side, compared to clubs
like Brighton £16.0 million, Fulham £13.4 million and Leeds United £12.6
million.

The recent lack of spending in the transfer market has been
reflected in Ipswich’s profit and loss account via player amortisation, which
has fallen from £5.1 million in 2009/10 to just £0.2 million in 2015/16.

In the same way, the lack of big money buys from other clubs
has impacted the balance sheet with the value of player (intangible) assets
decreasing from £6.4 million in 2010 to £0.3 million in 2016.

The accounting for player trading is fairly technical, but
it is important to grasp how it works to really understand a football club’s
accounts. The fundamental point is that when a club purchases a player the
transfer fee is not fully expensed in the year of purchase, but the cost is
written-off evenly over the length of the player’s contract, e.g. Grant Ward
was bought from Tottenham for a reported £600,00 on a three-year deal, so the
annual amortisation in the accounts for him is £200,000.

To place this into perspective, Ipswich’s player
amortisation of £0.2 million is one of the lowest in the Championship, only
ahead of Rotherham United. The highest player amortisation is obviously found
at clubs recently relegated from the Premier League, namely Hull City £21
million, QPR £16 million, Cardiff City £11 million and Fulham £11 million.

Net debt fell by £0.7 million from £87.2 million to £86.5
million, as gross debt was reduced by £1.6 million from £88.2 million to £86.6
million, but cash also dropped by £0.9 million from £1.0 million to £0.1
million. Nevertheless, debt has shot up from the £36 million in 2008, which was
largely taken on by Evans when he bought the club.

Almost all the debt is owed to various Marcus Evans’
companies, mainly through a mixture of loans and convertible loan notes. There
are also £8 million of preference shares, which pay a fixed dividend of 7% per
annum (provided there are profits available for distribution). To date, the
club has accrued £4.8 million for these dividends. Against that, interest has
not been charged on the Loan Notes 2026 from July 2014.

Of course, many clubs in the Championship have built up substantial
debt, but Ipswich’s £87 million is only surpassed by five other clubs: QPR £194
million, Brighton £171 million, Cardiff City £116 million, Blackburn Rovers
£104 million and Hull City £101 million.

The club has emphasised that it is not in debt to any
financial institution, as explained by finance director Mark Andrews, “''Most
Championship clubs are carrying debt but the majority of debt carried at
Ipswich Town is not external, it is owed to the Marcus Evans Group.”

Milne added, “Marcus is very happy with the debt level –
it’s all owed to him, none of it is owed to banks or anything like that. He,
like a number of owners, doesn’t expect to get any of it back unless we get in
the Premier League.”

This is indeed true, but there is still a degree of risk
associated with such an arrangement, as the annual accounts noted: “the club
remains dependent upon ongoing financial support from its principal
shareholder.”

From a cash perspective Ipswich basically balance the books,
but only because Evans increases his loan each year, as the cash flow from
operating activities remains stubbornly negative. In the last decade Evans has
provided £46.3 million via £32.8 million of loans and a £13.5 million increase
in share capital. Financing has also come from £7.4 million of net player sales
and a £1.5 million reduction in the cash balance.

However, the lack of investment over the last eight years is
striking with just £0.2 million being spent on infrastructure improvements in
the Evans era, i.e. virtually nothing on the stadium. Instead, almost all of
the funding has been used to simply cover the club’s operating losses.

Former chief executive Simon Clegg explained Ipswich’s
dependency on the owner a few years ago, “We only survive because Marcus Evans
can afford to put in £4 million or £5 million of his own money every year to
keep the club afloat”, while Evans repeated the mantra last December, “I am
committing sums of £5 million and more per annum, at the start of each season
towards the annual budget.”

That was certainly true in the past, but the cash flow
statement shows that only around £400,000 of additional loans were received by
the club in each of the last two seasons (net £250,000 after loan repayments),
as the difference was largely compensated by player sales.

That may have changed this season, but Milne noted in a
slightly worrying statement that, “You can’t keep expecting the owner to keep
throwing money at things.”

Either way, Ipswich’s cash balance as at 30 June 2016 was
down to just £91,000, one of the lowest in the Championship, though in fairness
none of the clubs is sitting on a cash mountain.

One accusation against Evans’ ownership is that there has
been a lack of transparency around the club’s affairs, epitomised by HMRC
issuing a winding-up order in February 2016 for non-payment of tax, though this
was subsequently dismissed – and described by Milne as “a storm in a tea cup”.

Yet the main charge is that the owner lacks ambition. The
man himself has argued that this is not the case, effectively laying the blame
at the feet of Lady Luck: “When I took over here I was hoping we would get to
the Premier League in five years. I never had a firm expectation though. I
realised that in football there are so many factors outside of your control.”

In fairness, Evans’ cautious approach has to be considered
preferable to that applied by some owners (Bolton Wanderers, for example),
especially for a club like Ipswich Town that experienced administration in the
not too distant past.

"Hard to Berra"

In any case, he cannot simply buy success, as Ipswich need
to comply with the Financial Fair Play (FFP) regulations. Evans had been a keen
supporter of this initiative, “It is a key objective of the Board to reduce
ongoing losses in order to meet the Football League’s FFP rules.”

However, he has become increasingly disillusioned, “FFP,
which was brought in to level an increasingly uneven playing field hasn’t
worked.” This is not just due to the advantage that parachute payments bring to
clubs facing a cap on losses, but the application of the regulations.

Evans again, “At the moment it appears to be a total farce.
However, let’s wait and see if the Football League does its job. I appreciate
that legal wheels sometimes grind very slowly.”

Under the new rules, losses will be calculated over a
rolling three-year period up to a maximum of £39 million, i.e. an annual
average of £13 million, assuming that any losses in excess of £5 million are
covered by owners injecting equity. A higher loss one year can be compensated
in later years, e.g. via player sales, or might even become irrelevant (if the
club is promoted).

"No Tears for Sears"

Basically, the allowable losses have increased, which is
likely to encourage Ipswich’s rivals to spend even more, making the division
even more competitive. For Ipswich to challenge, Evans would have to inject
equity to maximise allowable losses.

It should be noted that FFP losses are not the same as the
published accounts, as clubs are permitted to exclude some costs, such as
depreciation, youth development, community schemes and any promotion-related
bonuses.

These barriers help explain Ipswich’s focus on youth
development, as explained by Evans: “I am 100% committed to the Academy and
have recently invested over £1 million in new infrastructure and additional
staffing. I believe our efforts of the last years are starting to pay off.”

Despite failing to secure the coveted Category One status, a
number of talented players have emerged from the Academy over the last couple
of years, e.g. Andre Dozzell, Teddy Bishop, Josh Emmanuel and Myles Kenlock.
Furthermore, Town had three players in the England squad at last summer’s U17
European Championship.

"Teddy Picker"

Evans recently underlined his commitment, to Ipswich Town “I
will continue to do everything I can to ensure that the success we want is just
around the corner and that we are promoted.” However, he put his finger on the
main issue in the very same statement, “There are those that feel my investment
plan has no chance of success.”

This is a reference to the feeling that it is unlikely that
a club like Ipswich could be promoted to the Premier League without the benefit
of substantial investment, particularly in a world of ever more lucrative
parachute payments to clubs relegated from the top flight.

It would indeed be a major surprise if Ipswich were to go
up, especially given their current lowly position. Stranger things have
happened, but not too often.

Praise for The Swiss Ramble

"Blogger of the Year 2013 - It’s testament to the effect that Kieron has had on the blogosphere that so many fans take his word as gospel. Putting to use his career in the world of finance, his insights into balance sheets and simple explanations of complex ideas appeal to the hardcore financial whizz and casual fan alike." - The Football Supporters' Federation